As Occupy Wall Street protesters criticize high unemployment and economic inequality, a little-known diversity mandate embedded in the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173 / Public Law 111-203) is forcing a different kind of occupation within those very financial institutions. In 2012, Wall Street firms must be prepared to prove they’ve made a good faith effort to employ women and minorities or else they stand to lose billions of dollars worth of contracts with the federal government.
In other words, Dodd-Frank is mandating that more women and minorities must occupy lucrative Wall Street jobs that heretofore have been dominated by white men who, in gender and ethnicity, resemble Gordon Gekko, the anti-hero of the movie Wall Street and of its sequel.The Dodd-Frank provision is buried within some 850 pages of legislative text designed to strengthen the financial sector, promote economic recovery and job growth, protect consumers, and permanently end taxpayer bailouts of private institutions. Section 342 of Dodd-Frank embeds 20 Offices of Minority and Women Inclusion at virtually every major financial regulatory agency of the federal government: Treasury, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the 12 Federal Reserve banks, and the newly created Consumer Financial Protection Bureau.
The offices are designed to serve as watchdogs, monitoring the diversity of the agencies and the government contractors and subcontractors with which they do business. The list includes “financial institutions, investment banking firms, mortgage banking firms, asset management firms, brokers, dealers, financial services entities, underwriters, accountants, investment consultants and providers of legal services.”Wall Street’s issues with gender diversity date back to the now infamous “Boom-Boom Room,” Smith Barney’s basement party room where lap dances took place in the 1990s. Since then, females across the industry have shared similar tales about how they were sexually harassed with vulgar talk; excluded from business lunches, meetings and golf outings; and how their careers were hindered or damaged.
While consciousness has been raised and while the numbers of female and minority executives have improved, the vast majority of Wall Street firms lack diversity in the upper ranks. And that disparity could be a big problem in the eyes of Dodd-Frank regulators. Wall Street does billions of dollars in business with the federal government for services that include debt issuances, sales of government assets, as well as more general advisory services.
That business now may hinge on a Wall Street firm’s ability to correct racial and gender imbalances. According to Dodd-Frank language, if a federal agency’s compliance director concludes that a contractor has not made “a good faith effort to include minorities and women in its work force,” the agency head is authorized to cancel the contract. In other words, contracts worth billions are at stake — a dollar amount designed to be so significant even the wealthiest 1% would take notice.How can you determine whether Dodd-Frank diversity mandate applies to your firm? Chances are Dodd-Frank does apply if the following describes your current firm:
- Your company is an investment banking firm, mortgage banking firm, asset management firm, broker, dealer, financial services entity, underwriting, accounting, investment consulting, or law firm.
- Your company does business with the federal government’s financial agencies: Treasury, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the 12 Federal Reserve banks, and the newly created Consumer Financial Protection Bureau.
What should you do if you determine that Dodd-Frank diversity mandate applies to your firm? Your company must demonstrate that it has made a “good faith” effort to employ women and minorities. Clearly, “good faith” is subject to regulatory interpretation. However, Wall Street firms that demonstrate incremental improvement year over year in the diversity of their workforce may be better positioned for compliance than those that do not.
Employers also need to make sure that rounds of recent layoffs have not had a disparate impact on protected classes: workforce reductions and reorganizations have a way of eroding diversity ratios. Still, steady improvement may not be enough if regulators determine an organization could and should be doing more. To prepare for impending diversity regulations, potential next steps include the following:
- Define the baseline. Quantify the percentage of qualified women and minorities in the labor markets from which you recruit.
- Quantify the percentage of women and minorities in your current workforce, broken out by level, function, and geography.
- Compare your company’s diversity to the diversity of the labor market and identify opportunities for improvement.
- Focus the diversity talent pool and pipeline initiatives on the levels, functions, and geographies where they’re needed the most.
- Identify, map, and cultivate relationships of diverse talent at all of your favorite target companies.
Because Dodd-Frank diversity regulations are still being written, few Wall Street employers are fully conscious of its impending diversity mandate. One head of diversity for a global investment bank told me he fears that by the time those regulations are announced next year, there simply will not be enough time for Wall Street firms to come into compliance. Consequently, my colleague maintains that the time to act is now.
Dodd-Frank is the law. Wall Street companies can either ignore its diversity mandate at their peril or they can invite a growing occupation of corner offices and trading desks by female and minority employees. Interestingly, the latter choice also stands to make the workforce more economically diverse, which, in turn, may put Wall Street back in touch with Main Street. In fact, what may be most intriguing about the Dodd-Frank is the transformative potential of its diversity mandate. It holds the promise of reforming Wall Street from within.